Digital monopolies

The monopolies of the 21st century are entirely different than those of the 20th century; businesses that are run on bits have different constraints and different feedback loops than those that are run on atoms.

In many cases, monopolies are well-earned and actually help the consumer: Google has the best search results, so more people use Google, giving Google more data to improve their search results. Airbnb has the most rooms available, so more people book rooms on there, making them the best place to post an available room.

The U.S. Government’s framework

So how does the U.S. Government view these newly-minted digital monopolies?

The US attitude to anti-trust law was shaped by Robert Bork, the judge whom Reagan nominated for the Supreme Court but the Senate failed to confirm. Bork’s most influential legal stance came in the area of competition law. He promulgated the doctrine that the only form of anti-competitive action which matters concerns the prices paid by consumers. His idea was that if the price is falling that means the market is working, and no questions of monopoly need be addressed. This philosophy still shapes regulatory attitudes in the US and it’s the reason Amazon, for instance, has been left alone by regulators despite the manifestly monopolistic position it holds in the world of online retail, books especially.

The United States and European Union have, at least since the Reagan Administration, differed on this point [that network effects are the foundation of digital monopolies]: the U.S. is primarily concerned with consumer welfare, and the primary proxy is price. In other words, as long as prices do not increase — or even better, decrease — there is, by definition, no illegal behavior.

Strange consequences

The above definition has some strange consequences, most notably when products are free (ad-supported) or subsidized (by investors or by other lines of business).

Google is free to consumers (because you are not the customer; you are the product). Because it is free, the price (to the consumer) of doing a search cannot increase, and therefore there cannot be illegal behavior.

Uber‘s rides are heavily subsidized by their massive venture capital investments (59% subsidized, according to Motherboard). So while Uber is undercutting other companies that don’t have the luxury of being able to burn through venture money, the cost to the consumer is reduced, so there is no illegal behavior.

A better approach

By being myopically focused on short-term consumer prices, the U.S. Government is missing the broader picture of enforcing competition in markets, which will help consumers in the long term.

For example, if Google prioritizes its own restaurant ratings above Yelp’s, that is definitely an abuse of its position and will be a long-term detriment to consumers by reducing competition within the review market. Similarly, if Uber crushes a market by essentially selling its services at a loss, that may help consumers in the short-term, but long-term will reduce competition in that market (which, of course, is exactly what Uber and its investors want).

Any anti-trust regulation and enforcement needs to be focused broadly on companies that abuse their market position by engaging in anti-competitive practices, not merely ensuring that short-term consumer prices stay level or go down.

High-level technologies become possible

These basic technological advancements are making several higher-level technologies available.

Self-driving electric vehicles will soon be economically viable. Potentially within the next 3 to 4 years, electric vehicles will be cheaper than internal combustion engine (ICE) vehicles. Add to that the self-driving capabilities, and self-driving electric vehicles will be viable much more quickly than most people think.

Solar power generation and storage will also soon (in the next 3-5 years) become economically viable.

The first hurdle for this technology to clear is known as “grid parity”—i.e. can you generate and store electricity with solar for cheaper than you can get power from certain sources on the grid. Solar has already reached grid parity in many places, and soon solar+storage will also reach grid parity.

The second hurdle for this technology to clear is what Seba refers to as “god parity”—i.e. when solar+storage is cheaper than the transmission of power. Once this happens, it isn’t even economically viable to have central generation of power (e.g. power plants) even if generation were free except for areas that are too densely populated to generate all of their own solar power (think Manhattan).

Industries get overturned

So what does this mean for industry?

Individual car ownership will be replaced by Uber, Lyft, and other “Transportation as a Service” companies, all using self-driving electric vehicles.

Energy generation and transmission will drastically change. Not only will fossil-fuel-based electricity generation become untenable, even centrally-located power generation will become much less necessary. The electric grid will become something much more akin to the internet, with many nodes of generation and a more diversified and resilient transmission system. Not to mention what the transition away from ICE vehicles could do to the price of oil.